From the keynote address given by Phil Mullan, chief executive of Cybercafé Ltd, at Don't Blow IT, a one-day conference produced by spiked on Thursday 27 September 2001 at the Bloomberg Auditorium in London.

The attacks on New York on 11 September and what has followed since has cast a shadow over debates about the New Economy and the prospects for information technologies.

While I share the view expressed by Alan Greenspan - that the real economic implications of the Manhattan attacks will be a 'mere footnote' (1) among everything else that will be said and written - this turn of events does unfortunately reinforce some of the themes I want to discuss.

The immediate starting points today are these:

'The bubble has burst'

'The Gold Rush is over'

'The new, new thing is the dead, dead thing'

'The revolution has failed'

These are the sort of negative sentiments that exist in the aftermath of the internet phenomenon of the past few years. That would be bad enough for those of us who are frustrated at the slow realisation of the economic potential of information technology (IT) - but this negative mood is symptomatic of a more profound set of barriers and obstacles that have been holding back the internet and IT in general over the past few years.

For all the internet frenzy that we have been through at the end of the 1990s we have not yet done more than scratch the surface with the potential of these communications technologies. It is not hard to see how, on a computer-to-computer level, these new means of communication could take automation to a much higher level than anything seen before - and how, on a person-to-person, people-to-people level, they could stimulate and facilitate enhanced forms of human cooperation, which has always been a valuable productive force in its own terms.

It is our slowness in realising these tremendous possibilities that has motivated me to identify what these barriers are and what can be done to challenge them.

To summarise my thesis on the broader theme of the 'New Economy' and of the prospects for IT, and of what, if anything, went wrong with the 'internet revolution':
My argument is that there has been something new, in the sense of distinctive, building up in Western economies over the past decade or so. This newness is something deeper than the conventional accounts of the 'New Economy': the spread of information and communications technologies and the opening up of global markets. Instead the newness lies in the widespread assimilation across society, including the business world, of a culture of limits: the sense that we should be less ambitious and more restrained in the face of natural and social limits to growth.

This has produced a new paradigm of economic and technological restraint. The consequence has been to hold back both business and society generally from utilising these new technologies to their full potential.

So contrary to the usual assumptions today, our real problems with IT are not the result of over-investment in the technology. The problem is that there was too little focused investment (both in the intellectual and in the financial resources) in developing real productive uses for business and society. There has been too little deep thinking and too little purposeful experimentation.

The internet has been talked of as boom-bust cycle. I think we have had the worst of both worlds when it comes to failing to utilise these new technologies. The party phase - that frenzy of 1999 and early 2000 - was more cosmetic than real, yet the hangover of negativity today draws its sustenance from the belief that there was genuine excess of resources going into the technology.

To pursue the metaphor a little bit further - the task we have as advocates of new technologies is less to find a cure for the hangover, but to get people to see that the party never really happened and that the real party needs to get underway.

On this 'culture of limits' and the increasingly prevalent notion that society should hold back and be more restrained: at the root of this is an historic reversal of attitudes to economic growth and technological development. Growth and rising productivity and progress in general are increasingly viewed with apprehension if not antipathy. This has expressed itself in the prevalence of the notion that we need to pay greater attention to the more destructive sides of the market economy. As economists put it we need to do more about the negative externalities of pollution, global warming, depletion of natural resources and broader environmental and social damage resulting from development and growth.

And when it comes to the productive use of IT, sadly many business leaders have assimilated this sense of limits and restraint, wasting the opportunity of IT.

The consequence is that in economic terms the 1990s should be seen more as a period of slow drift rather than the start of a great long boom led by investment and new technologies. It is only the sense of low expectations, which coexists with the culture of restraint, that has made it possible to interpret this experience otherwise.

Even in the USA, despite the belief in a technology-led economic miracle, the average rate of growth during the 1990s as its longest ever peacetime period of expansion averaged about 3.6 percent a year which was lower than during the expansion phases in the 1980s (four percent) and the late 1970s (4.7 percent) - never mind the postwar boom years of the 1950s and 1960s.

Given that this characterisation of the last decade as 'slow drift' is so far removed from received wisdom about the renewed dynamism of the American New Economy here are some of the features of slow drift which I am sure are more immediately recognisable:

The rapid expansion of financial markets, financial activity and liquidity - the flip-side of the fairly staid real economy.

The ubiquity and entrenchment of a short-term business perspective (I stress the adjective 'business', we are not just talking about the traditional short-termist perspective of financial institutions). The lack of enthusiasm for growth and development, based upon genuine process innovation and long term investment, coexisted with the spread of a short-termist culture.

Restraint also manifested itself in the belief that the new economic and business world is also one of complexity and uncertainty. This contributed to a heightened susceptibility to exaggerate and over-react to events and especially to draw risk averse and cautious conclusions.

I want to illustrate these three features, which are interrelated and feed off each other, and at the same time show that they, and the new paradigm of limits and restrained growth, make more sense of the internet/technology, media and telecoms (TMT) boom than the conventional assumptions of a technology bubble such as the railways in the 1840s, automobiles at turn of century, or radio industries in the 1920s.

1) Financial expansion
This is the other side of the relative atrophy of economic growth. The sense of limits coexists with the explosion and added volatility of the financial side of the market. A slow dynamic in the area of production has gone alongside a boom in finance. Most of the new features of the past decade have been predicated upon the unusual level of liquidity. The basis for it is while business has continued to make reasonable profits less of this has been required to reinvest since overall productive investment has lagged for most of the decade. Therefore there has been plenty of money around to lubricate new financial activities. This financial explosion is not a long-term secular nor cyclical phenomenon but represents a paradigm shift in the 1990s. This can be illustrated in a number of ways:

Relatively low and stable interest rates, both in nominal and real terms

Huge expansion of credit

World bond markets more than doubled during 1990s, to $25trillion at end 1997 (2)

Consumer debt in Britain rose from about six percent of personal disposable income in the 1970s to 12 percent in the first half of 1990s (3)

US stock market capitalisation risen by about three times faster than economic growth so that as a ratio of GDP grown from average 50 percent of previous half century to 150 percent (4)

US mutual funds risen from $1trillion in 1990 to about $7trillion, and the number of funds soared from 3000 to over 8000 over same time span (5)

Derivatives trading grown from nothing in the 1970s to a few trillion dollars in the 1980s to over $100 trillion today.

This explosion of financial activity is not restricted to the financial institutions but industrial corporations act more as financial ones. For example:

Corporate Venture Capital funds)

Company profits, including for many large IT companies, enhanced by the booking of appreciation of share holdings)

Business strategy has become not much more than mergers and acquisitions and related financial engineering. At a time when entrepreneurship has supposedly taken off it is striking how many company leaders come from the investment banking and accounting worlds.)

One expression of this decade of financial expansion is that the internet frenzy was much more a financial boom than a technology one. So while a lot of people make comparisons between the internet and the early growth of electricity generation or the railways, a more appropriate parallel is with the East Asian crisis of 1997 and 1998. In both cases we have something real (either a dynamic region or an exciting technology) which becomes magnet for much of the spare financial resources creating a dynamic of a financial explosion which eventually gets too far removed from underlying reality and implodes.

The basis for the internet financial boom was the ease of securing money, through venture capital (VC) to private companies, initial public offerings (IPOs), additional equity issues, company bonds and other forms of corporate debt.

For example, another symptom of the 1990s financial explosion was the tremendous growth of VC to provide seed capital, finance start ups and fund expansion in new companies. From barely existing in the 1970s VC invested by US and European funds rose to about $10bn in 1992 before soaring 14 times to $140bn in 2000. (Of this the fastest growing part is from corporate venture funds rising from about zero in the mid-1990s to about $20bn in 2000.) And although VC investments are at present running at only half year 2000 levels even if no more VC investment occurs in the rest of this year, 2001 will still be the third highest year on record. Perhaps more significantly the current new investment slowdown does not mean that VC has dried up. On the contrary, the US National VC Association reports that what they call the overhang of available funds stood at a record $45billion at the end of June this year.

And in contrast to the earlier technology booms with which the internet is compared, when society at least benefited from the creation of physical capacity, this has been much less the case with the internet experience. Despite the parallels in that most of the early moving companies did not survive, and that many investors lost money on the stock markets, a lot of resources raised at least in these other bubbles went into creating new thing (canals were built, railway lines were laid, electricity generators and cabling was installed).

With the internet phenomenon there have been two big differences. Firstly most of the infrastructure was already in place before the boom began. Long before the first serious commercial applications of the web in 1995 the internet infrastructure of servers and cable networks was already built, publicly funded during almost 40 years of expensive research and development and experimentation and building prior to its effective privatisation. Secondly when the internet/TMT-boom proper began in 1998 a much smaller proportion of newly raised funds went into productive investment. Certainly there is more fibre in the ground than we will need for a long time, and enough data centres built to keep us going for bit too, but a lot of the money never got into the productive sphere in this way.

A buzz phrase of the internet boom was disintermediation, but many of the dotcom and other internet IPOs, as well as more substantial technology and telecoms companies, operated as a new type of intermediary in channeling funds from financial markets elsewhere into the economy. Some went back into government coffers (about $100bn for 3G wireless licenses), and billions more went into the advertising and marketing industry and back into other or the same financial institutions from which it derived in fees and other charges.

2) Short-termism
I am sure we are all familiar with these trends. For example we have had the elevation of shareholder value in business practice over the past few years, and we know how the next half-yearly, or in the US quarterly, figures have assumed much greater prominence in business operations.
In some ways a short-termist culture seems the least distinctive of the new features - it's always a tendency within market economies to go for short term gain over long term growth. Often the financial institutions used to get the blame for this tendency. But the shift in degree can be seen by the way business today is no longer apologetic about short-termism but tends to embrace it as a virtue. Large sections of business have openly adopted short-termist approach traditionally associated with the City institutions.

It is argued that we live in such a fast moving world that strategic planning is for dinosaurs. There is no point, it is argued, for undertaking the sort of long term investment in the search for returns in five or 10 years time because by then your market may have changed completely.

This is more than a passing change in attitude. It is becoming institutionalized in a number of ways. For example, the Corporate Governance movement well illustrates both sides of the current paradigm: restraint through the normalization of risk management procedures and internal controls, while getting managers to adopt the perspective of the owners, predominantly the financial institutions. Reinforcing this trend is executive payment through stock options and therefore an encouragement to maximize shareholder returns in the short term.

This partly explains the appeal of the web to business. The notion of the 'new internet economy' seemed to endorse this quick fix, short term financial gain mentality, and reinforced it. The business-to-consumer (B2C) and business-to-business (B2B) focus played to the easiest but also least beneficial aspects of the Web - the one a relatively cheap new route to market, the other another way to cut procurement costs.

3) The acute sense of business uncertainty and of things being out of control
The idea that we live in very uncertain times unites both techno-critics and techno-enthusiasts The notion that we are in a new era of rapid innovation, fast change and hyper-competition gives a more positive gloss to the everyday sense of economic anxiety, insecurity and business uncertainty summed up in this year's new business buzz phrase: 'the lack of visibility'.

Against the backdrop of the relatively constrained and stable real economy alongside the explosive and more volatile financial economy, there is greater scope for perceptions to matter. While the real world is more constrained the world of perceptions is less constrained and can have real consequence. And these perceptions tend to be exaggerated and lead to overreaction to events. This expresses itself both as an over-exuberant response to huge perceived opportunities - namely the 'internet revolution' changing all our lives utterly - and, more problematically, an overanxious, panicky and over-cautious response to exaggerated dangers or threats.

For example, the current global slowdown has a more self-generated character than normal business cycle recessions. The traditional business cycle in the 1960s and 1970s and 1980s were of accelerating growth, leading to the overproduction of capital bringing about a necessary stagnation phase where shakeout and restructuring occurs to lay the foundations for the next period of expansion.

This slowdown is different. Outside some specific sectors (telecoms and IT producers) and specific types of capital purchases (office computers) it is not possible to give substance to the idea of an investment boom. Instead the very perception that we are entering a recession has encouraged a type of business behaviour which has accentuated the slowdown tendencies. Investment plans are curbed, other non-essential spending is put on hold and lay-off decisions accelerated and expanded. It is in many respects a recession of self-fulfilment.

On this theme of self-reproducing slowdown I return to that enormous human tragedy in lower Manhattan. I agree with the economic perspective that situates the New York events as an accelerator or reinforcer of existing trends, rather than as direct economic determinant in itself. From an economics perspective the reaction to the attacks makes the economic paradigm clearer by highlighting the tendency to overreact to events. Unfortunately, it actually aggravates the sense of business anxiety and fear and the reinforcing restraint which will depress economic activity further.

Prior to 11 September I, like many others, was of the view that the US slowdown would not become a technical recession in the sense of two quarters of negative growth. Now the probability has reversed and I think that it is more likely than less that we will see recessions both in the US and possibly Britain and other European countries too. Objectively there is no inherent reason for such a contraction but there is a strong dynamic at work here. As Federal Reserve chair Alan Greenspan said last week in his classic prose, 'The shock of September 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in a pronounced disengagement from future commitments' (7).

And by exacerbating the economic slowdown this is, of course, bad for IT innovation and development.

So on the spiked conference theme of 'Not wasting the potential of IT', this is what needs to be done:

I doubt anything much can be done to stop the recession and this will be bad for IT spending. As Steven Milunovich, Global Technology Strategist at Merrill Lynch said on 19 September about the impact of the Manhattan attacks: 'I think most corporations are just going to hunker down and not spend on anything that is not absolutely necessary'. But in the spirit of trying to minimise the damage it is still worth pushing and updating that old FDR maxim for the business world 'the only thing to fear is fear itself'.

More generally we need to explain and challenge the backlash against the internet/IT. Too much expected of it on the basis from not enough real commitment.

We must challenge the lesson being drawn from the internet frenzy that we need even more restraint. For example, in the Financial Times on 4 September Peter Martin argued that the central message from that experience for investors and implicitly for business leaders is that 'speed kills' (8). Slow down, he said, hold back, beware the next new business bandwagon, and adopt an even more cautious approach.

Finally we must resist the regulationist impulse which can only tether and constrain the possibilities of IT further. Although I have explained that the main obstacles to economic and technological development today derive from self-restraint and self-regulation, more state regulation of the internet can makes things a lot worse. Another unfortunate consequence of September 11 is that we will hear the argument that we need more regulation to counter terrorism and defend freedoms. We need to resist this dangerous dynamic in the interests of genuine freedom and progress.